The curious case of Engineers India

IN September 2002, even as he objected to the modalities of the disinvestment in the public sector oil companies, Union Minister for Petroleum and Natural Gas Ram Naik cleared the hurdles for the strategic sale of another profit-making company under his Ministry's charge Engineers India Limited (EIL). The company is one of the leading project consultants, with its core strength being focussed in the oil industry. About six to seven companies are believed to be in the race for the acquisition of a controlling stake of 51 per cent in the company. A Russia-based company, in alliance with an Indian trading company, is said to be "in the lead", according to an informed source in EIL.

As the controversy over disinvestment raged, Ram Naik conceded that other public sector companies would be allowed to bid. Hence while the Gas Authority of India Limited (GAIL) is bidding for the EIL stake with Larsen and Toubro, Bharat Heavy Electricals Ltd (BHEL) and the Oil and Natural Gas Corporation (ONGC), two publicly-owned companies, are also on the scene. Critics recall the controversial sale of Indian Petrochemicals Ltd (IPCL), in which the publicly-owned oil major, Indian Oil Corporation, was not allowed to participate (Frontline, June 21, 2002).

Ram Naik's claim about holding aloft the flag of "national interest" rings hollow to critics. His interpretation that the continued government ownership of EIL did not amount to a strategic interest is seen with scepticism because EIL has been the key player in the installation of petroleum and petrochemical projects in India for almost 30 years. In November 2002, Secretary of the Ministry of Disinvestment, Pradeep Baijal, maintained that the EIL disinvestment was tied to those of the major oil companies on the block Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL) because a substantial part of EIL's revenues came from its contracts with these companies. The separation of the EIL sale from that of the oil companies would lower the price that strategic investors would be willing to pay for EIL.

Informed sources in EIL told Frontline that the winning bid, due to be finalised soon, "is bound to be controversial". They say that there is bound to be difference between the price based on the average share price in the market, and that following the discounted cash flow method, which is what the government will use to evaluate the financial bids. Meanwhile, the Petroleum Ministry has initiated moves to strip EIL's cash reserves, said to be about Rs.500 crores. The Ministry also turned down a request by the EIL Employees Association to halt the privatisation. Earlier, the Association even attempted to buy out the government stake in a desperate attempt to prevent the company falling into the hands of private players.

EIL, founded in 1965, has had a key role in the development of the oil industry in India. While building up a substantial pool of manpower with specialised skills, it has substantially lowered costs of project and consultancy services. The company has a substantial international presence, particularly in West Asia, where it has executed several mega projects.

M.S. Pathak, who headed the company in its early stages, has argued that continued government ownership of EIL fulfils a strategic interest and is associated with national security. He has termed the privatisation policy as "seriously flawed" and as being "one-dimensional". He said that the mindless quest to privatise at any cost would seriously undermine national economic sovereignty.

Critics argue that the government has completely ignored the special status of a consultancy company. The reputation and standing of technological service companies like EIL in contrast to manufacturing companies is crucially related to who owns the company. EIL, with a strength of more than 4,000 qualified engineers, is regarded to be the best such company in Asia, besides those in Japan. It has developed indigenous capability in all aspects of the oil industry.

Takeover by a private company would result in customer perception that EIL is "tied" to the new owner. The change, from the status of being a "neutral" player to that of a "tied" player, can affect its credibility. If the new owner's main business is in the oil industry, it would need to expand its reach in the engineering projects and consultancy (EPC) areas. Customers would regard EIL as being part of a competitor and may suspect that the company will not be cost-effective. However, if EIL is sold to an existing EPC, it will be perceived by prospective customers as "tainted". The third possibility, that of EIL being acquired by a manufacturing company, is also likely to be detrimental to the company's long-term interest. This is because the new management may promote the use of its own products in EIL's projects, which may impair its competitiveness. If EIL is acquired by a foreign company, it would become subservient to the demands and pressures of the new management's business interests.

EIL's takeover would, in short, deprive the company of its independence, and its ability to be competitive. Greater autonomy and independence, rather than its sale, is likely to promote EIL and the Indian oil industry's interests in the long term. But the disinvestment policy does not have room for such options.